PHARMACETICALS ATTRACT SOME BUYING -- GROUP LEADERS ARE ABBOTT LABS, SCHERING PLOUGH, MERCK, AND BRISTOL MYERS SQUIBB

DRG CLEARS 200-DAY MOVING AVERAGE ... Arthur Hill commented on new buying in pharmaceutcals yesterday. I'd like to expand on that theme today. Although money has been flowing into defensive groups like consumer staples and healthchare, we haven't seen too much interest in pharmaceuticals. Until this week The AMEX Pharmaceutical Index (DRG) is one of the day's strongest groups. Chart 1 shows the DRG trading at a two-month high and back over its 200-day moving average. The relative strength (solid) line, however, shows that the group is been a weak performer over the last year (actually for several years). The weak group performance, however, masks much stronger action in several individual drug stocks. One reason is because the two biggest stocks in the DRG -- Johnson & Johnson and Pfizer -- have been among its weakest components. Let's look at some leaders.

Chart 1

ABBOTT LABS IS SIX-YEAR LEADER ... Chart 2 plots the four top drug performers since 2000. They're plotted related to the Pharmaceutical Index which is the flat black line. What stands out on the chart is that Abbott Labs (blue line) has been the standout drug performer since 2000. However, Merck (red line), Schering Plough (green line), and Bristol Myers Squibb (pink line) have been showing drug leadership over the last three years. Let's take a closer look.

Chart 2

NEW THREE-YEAR DRUG LEADERS ... Chart 3 shows how well those three drug leaders have done over the last three years relative to the DRG Index (flat black line). Schering Plough (blue line) outperformed the DRG by 69%, Merck (red line) by 58%, and Bristol Myers Squibb (green line) by 26%. Chart 4 shows the four drug leaders (including Abbott Labs) doing much better than the drug group during 2007. The moral is this. Pharmaceutical stocks may finally be benefitting from the recent move into large cap multinational stocks with defensive characteristics (which may also be getting a boost from a weaker dollar). Although some investment in the entire group (which is cheap relative to the rest of the market) makes some sense, you'll probably do better by concentrating on the drug leaders shown herein.

Chart 3

Chart 4

A CHART LOOK AT THE TWO DRUG LEADERS... Charts 5 and 6 show a daily bar chart of this year's two drug leaders. Schering Plough (Chart 5) is nearing a test of its 2007 highs. The relative strength line along the bottom shows it gaining against the S&P 500. Chart 6 shows Merck in a consolidation pattern between 53 and 48. Its relative strength line has also held up quite well against the S&P 500.

Chart 5

Chart 6